Cryptocurrencies and blockchain: hype vs. reality

There certainly has been much excitement and anxiety in recent weeks about bitcoin and other cryptocurrencies and their ups and downs. 

Relatively few folks, though, have focused much attention on the blockchain technology that enables cryptocurrencies to function as they do. Yet, this technology is being evaluated for numerous applications apart from cryptocurrencies.

{mosads}The essence of blockchain technology — the creation and continuous updating of a database of information as transactions occur — is hardly new; in fact, it is several centuries old. Perhaps the oldest and most widespread use of blockchain is double-entry bookkeeping, which dates to the 15th-century Italian city-states, if not earlier.

Bookkeeping, or accounting — the terms are practically synonymous — involves the recording of individual transactions in books of original entry, called journals. Those transactions are then summarized in ledgers — the very term used to describe a blockchain database — from which periodic financial statements are prepared.

An individual account in an accounting ledger is the functional equivalent of a unique token in a blockchain database. That is, at any point in time, the balance in an individual account is the summation of all of the transactions posted or entered into that account from the time the account was created. 

Those transactions are the debits and credits of accounting systems. A balance sheet is merely a snapshot, at a point in time, of what an enterprise owns and to whom it owes money. The difference between the two numbers represents the business’s equity capital. 

A balance sheet derived from a blockchain database provides comparable information — the quantity of utility or security tokens in a blockchain’s database and who owns those tokens.

Another newer, yet well-developed blockchain-like database are property records that document the ownership of land and whatever has been constructed on that land, such as homes, stores and office buildings. 

Those property records consist of deeds, liens, easements, etc., that are recorded chronologically in deed books maintained in the offices of the local clerk of courts or recorder of deeds.

Importantly, the sequence of individual transactions affecting a particular piece of property, or a token in a blockchain database, constitutes a “chain of title.” This chain is updated as new transactions are recorded. Hence, it is fairly easy to determine who currently owns a particular piece of property, or blockchain token, and who has a claim on that property, such as a bank that has a mortgage lien on it.

Much is made of the verification of blockchain transactions. So-called “miners” in the “mineable” cryptocurrencies perform that verification process. In accounting systems, procedures are established — a division of duties — to ensure that one person cannot perform all aspects of creating and recording a particular transaction. 

That division reduces the likelihood of fraud and embezzlement. Auditors provide an additional level of verification. 

The recording and auditing of financial transactions is not foolproof — thefts and defalcations occur — but that has happened in cryptocurrency blockchains, too, as evidenced by the repeated hacking of cryptocurrency exchanges and the theft of coins, which I wrote about recently. 

Blockchain verification procedures, designed to prevent the counterfeiting or duplication of specific blockchain tokens (“double spending” in crypto terms) certainly have not prevented the theft of cryptocurrencies nor ensured their recovery. The recent hack of Coincheck led to the theft of $533 million of NEM tokens.

Looking forward, the total market value cryptocurrencies almost certainly has peaked and will continue to lose value. The well-known economist Nouriel Roubini, also known as “Dr. Doom,” recently predicted that the bitcoin price will “crash to zero.”

If that happens, most other cryptocurrencies will crash, too, with losses to investors in the hundreds of billions of dollars. As of 11:30 a.m., Eastern Standard Time, on Friday, the total market value of all cryptocurrencies was $411 billion, according to CoinMarketCap.

As painful as that loss would be to cryptocurrency investors, it would be positive for the blockchain technology, which is the operational foundation for all cryptocurrencies. Then, entrepreneurs as well as businesses with their technical talent will focus more attention on developing practical, value-added applications of blockchain. 

It is anyone’s guess as to how widespread the uses of blockchain technology potentially could be, but the country and the economy will benefit economically when much more attention and human talent is focused on productive uses of that technology rather than the latest up or down movement in bitcoin’s price.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk. Find his other pieces on cryptocurrencies here, here, here, here, here and here.